Should Law Firms Pay Attorneys More?

The perennial compensation conundrum never quite goes away. Competition for top lawyers is stiff, so firms that want to attract the best legal talent have to get the offer package right. And a big part of that package often gets reduced to one question: Are we paying enough?

I’m here to tell you that question doesn’t give us the full picture.  

The reframe here is to evaluate whether your firm is paying enough to get the business outcome it needs from its attorneys. Those are not the same thing.

A law firm can underpay attorneys and save money in the short term, but the side effects of that strategy often mean losing good people, spending more on recruiting replacements, disrupting client relationships, and putting additional pressure on the attorneys who stay.

The alternative is not necessarily any better. Increasing compensation across the board because the market is competitive may not get you where you want to go either. Higher salaries increase fixed costs. If revenue, productivity, pricing, and workload do not support the increase, the firm can end up with thinner margins and still may not solve any retention or performance problems.

So what’s the winning solution? Should law firms pay attorneys more?

Sometimes the answer is yes, but the real financial analysis is more complicated than looking at salary benchmarks and deciding whether the firm can afford another $20k per attorney. The calculation needs to assess whether the return on additional compensation exceeds the cost.

Below, I’ll break down the economics behind attorney compensation, when paying more makes sense, and how firm leaders can make compensation decisions that support both their people and the firm’s long-term financial health.

The Cost of Paying Too Little

It’s common to look at compensation as an expense line. From an accounting perspective, this makes sense, but it becomes a problem when it’s the only perspective.

An attorney who earns $200,000 instead of $225,000 costs the firm $25k less. On paper, that looks like a savings, but what happens if that attorney leaves? Now the firm has recruiting costs, interview time, onboarding, training, lost productivity while the new attorney gets up to speed, potential disruption to client matters, additional workload for other attorneys, etc. Suddenly, the $25k that looked like savings is gone.

What’s more, there’s also a less obvious cost of losing an attorney, and that’s the effect it can have on the rest of the team. When experienced attorneys leave, their work doesn’t disappear. It gets redistributed. Deadlines become harder to manage, and there is greater opportunity for errors.

Eventually, someone else starts thinking about leaving. The dominoes start to stack up, and this is how a compensation problem becomes an operational problem. When firms view attorney compensation in isolation instead of looking at the economics of the entire employee lifecycle, they can run into a bigger retention problem.

The Cost of Paying Too Much

It seems obvious that the opposite mistake of paying too much is just as real, but not necessarily in the way more people think. There is a tendency in a competitive hiring market to assume that the answer to every recruiting or retention problem is higher compensation. It isn't. If a firm’s culture is pushing people away, another $25,000 likely won’t fix the problem. Maybe it’ll serve as a temporary band-aid, but it won’t heal the wound. At worst, it could make the firm less profitable while leaving the underlying issue untouched.

Another consideration when it comes to compensation is the market rates for your services. If your rates are already 10% higher than your competitors, raising your rates another 10% to give your team a raise while keeping your margins steady might push clients out the door. The effect may not be quite the same for firms that work on contingency, but your cashflow needs to adjust for any increased salaries.

This doesn't necessarily mean firms shouldn't pay more. It just means compensation needs to be connected to the firm's business model and your firm’s operations.

The Question Isn't "Can We Afford It?" Rather, “What Does Additional Compensation Buy Us?”

One of the most useful ways to think about attorney compensation is to stop asking whether the firm can afford to pay more. Instead, it should start asking what the additional compensation buys. There are several possible answers.

• It might buy retention.
• It might buy productivity.
• It might buy recruiting access to a stronger talent pool.
• It might buy specialization or expertise the firm currently lacks.
• It might buy leadership capacity.
• It might buy the ability to take on more sophisticated or higher-value work.
• Or it might buy nothing meaningful.

That last possibility is a reality you can’t ignore. A firm should not increase compensation just because another firm is paying more and they think they need to stay competitive. Compensation should be an investment with an expected return.

If paying an attorney an additional $25k makes it significantly more likely that the attorney will stay for another three years, take on more responsibility, develop a book of business, or allow more profitable work to be delegated, that $25,000 may be a very good investment. If it increases payroll while everything else stays the same, it probably isn't.

Start with the Economics of the Attorney

The first step is understanding what each attorney contributes to the firm's economics. Revenue is the starting point, but it isn't the whole equation. A highly compensated attorney that generates a significant volume of high-margin work may be extremely profitable . Another attorney with a lower salary may generate less revenue but provide critical capacity that allows everyone else to focus on business development or higher-value matters. That’s why you need to look at the full picture.

Here are a few areas to consider when running your calculations:

• Compensation and benefits
• Billable hours
• Realization rate
• Collection rate
• Revenue generated
• Matter profitability
• Administrative demands
• Supervision required
• Client relationships
• Business development contribution
• Specialized expertise
• Leadership responsibilities
• Capacity created for other attorneys

An attorney is far more than a salary. They’re part of a production system, and the financial question is how effectively that system converts attorney time, expertise, and relationships into profitable revenue.

Revenue Per Attorney Isn't Enough

Law firms sometimes rely on revenue-per-attorney calculations when evaluating compensation. That's useful, but it can be misleading. Two attorneys can generate the same amount of revenue while creating very different levels of value for the firm.

One might require substantial supervision. The other might operate independently and manage a practice area. One might handle low-margin matters. The other might bring in highly profitable work. One might be difficult for clients to work with. The other might be responsible for retaining several major relationships. One might be replaceable. The other might walk out the door with a significant amount of institutional knowledge.

These examples demonstrate that the financial analysis needs to go beyond revenue and ask what kind of revenue the attorney is helping the firm generate, how efficiently they generate it, and what would happen if they were no longer there.

What Would It Cost to Replace Them?

Replacement cost is the calculation many firms leave out when considering the compensation question. Imagine that one of your attorneys earning $225,000 is considering leaving for a competitor offering $250,000. You might think, "We're not paying another $25,000." Fair, but what happens if the attorney leaves?

Start with recruiting. Then consider the time spent interviewing candidates, the cost of recruiters (if applicable), the time required to onboard the new attorney, and the period before that person reaches full productivity. Then consider the existing workload. Questions start to compound:

•  Who handles the departing attorney's matters while the firm searches?
• What happens to client relationships?
• Does the firm turn away new matters because it doesn't have capacity?
• And, perhaps most importantly, does the client follow the attorney?

The cost of turnover can be dramatically higher than the difference between the departing attorney's compensation and the replacement's compensation. Now that doesn't mean every attorney should receive a counteroffer, but it is a reminder that every firm should understand the economics before making the decision.

Compensation Can Be a Growth Investment

The strongest argument for higher attorney compensation isn't retention. It's growth. A good attorney can create capacity. That matters because time is often the most expensive resource in the firm.

If a partner is spending 15 hours a week doing work that could be handled by a capable associate, the firm is failing to use the partner's time effectively. That’s a double blow when instead, that partner could be developing business, managing key client relationships, building referral networks, recruiting, or handling higher-value legal work.

Hiring and retaining stronger attorneys can create leverage throughout the organization. The economics might look something like this:

• Pay an attorney more.
• The attorney stays.
• The attorney takes on more responsibility.
• More work gets delegated.
• The partner creates more business.
• The firm accepts more matters.
• Revenue increases.

That is a very different proposition from "paying attorneys more" because the compensation increase is part of a larger operating strategy.

But Higher Pay Doesn't Automatically Create Higher Performance

There is an important caveat. Compensation is an incentive, but it is not a substitute for management. A firm cannot pay its way out of poor role design. If attorneys don't know what success looks like, don't receive meaningful feedback, are not getting fulfillment (such as career advancement or work/life balance), and work within inefficient systems, additional compensation may have limited impact.

The same is true for productivity. If someone spends their hours dealing with administrative tasks, inefficient technology, unclear processes, or unnecessary internal meetings, paying them more doesn't solve the productivity problem.

In some cases, the better financial investment is to improve the system around the attorney. For example, a $25k investment in better technology, administrative support, or process improvement might create more value than a $25k salary increase.

Build Compensation Around the Business You Want

There is no universal answer for what a law firm should pay its attorneys. The right compensation structure depends on the firm's practice areas, market, size, economics, growth strategy, and talent needs, but there is a broader principle that applies across firms. Compensation should reinforce the behavior and business outcomes the firm wants.

If the firm needs attorneys to develop business, compensation should recognize business development. If the firm needs stronger matter management, that should be part of how performance is evaluated. If the firm needs attorneys to take on leadership responsibilities, those responsibilities should have economic recognition. If the firm is trying to build a long-term succession plan, compensation and advancement should support that objective. If the firm's biggest challenge is retention of experienced staff, the compensation model should make staying financially and professionally attractive.

The mistake is treating compensation as a number instead of a system.

Don't Forget Non-Salary Compensation

There is another financial consideration that gets overlooked when firms benchmark salaries. Most professionals don't evaluate employment based solely on base pay. They evaluate the entire proposition. That can include bonuses, profit-sharing, retirement benefits, health benefits, flexible work arrangements, professional development, mentorship, autonomy, and all the other aspects of a job that make it meaningful and rewarding.

Not every firm can win on base salary, but that doesn't mean it can't compete. A firm with a slightly lower salary but genuinely better benefits may be more attractive to the right attorney than a firm offering a larger paycheck and a miserable operating environment. The financial analysis should therefore look at total value, not just salary.

A Better Way to Make the Decision

Before increasing attorney compensation, firm leadership should be able to answer a few straightforward questions.

• What problem are we trying to solve? Is it recruiting? Retention? Productivity? Capacity? Leadership development? Succession?
• What is the cost of doing nothing? If the attorney leaves, what does the firm lose?
• What will the additional compensation change? Be specific. "They'll be happier" isn't a business case.
• Can the firm generate enough additional margin or capacity to support the increase? If not, what other costs will have to come down?
• Is compensation the problem? Or is the firm dealing with management, workload, culture, technology, or career-path issues?
• Does the compensation structure reinforce the firm's strategy? If the firm wants to become more profitable, scalable, and less dependent on individual partners, compensation should help move it in that direction.

Those questions turn a potentially emotional discussion into a financial and operational decision.

The Real Financial Trade-Off

The question "Should we pay our staff more?" sounds like a compensation question. Instead, it’s really a question about how a law firm allocates capital. Every dollar spent on compensation is a dollar the firm can't spend somewhere else. But every dollar saved on compensation has a potential cost as well.

The right decision requires looking at both sides. What does the firm gain by paying more? What does it risk by paying less? What happens to profitability?

What happens to capacity? What happens to retention? What happens to client service? And so on and so forth. There is no universal percentage increase that answers those questions.

But there is a useful rule: don't make compensation decisions based solely on what attorneys cost. Make them based on what attorneys contribute, what they enable, and what the firm stands to lose if they leave. That's how compensation becomes a business strategy rather than just another expense on the P&L.

If your firm is wrestling with compensation, retention, profitability, or the economics of building a stronger team, those are not separate problems. They are pieces of the same operational equation. Wellspring Business Strategies works with law firm leaders to look at that equation strategically and build a firm that can grow without sacrificing profitability. Reach out to book a consultation and start the conversation.